Nations Moving Together For Economic Stability, OR FIRST STEP INTO NEW WORLD ORDER?

Central Banks Coordinate Global Cut

in Interest Rates

By KEITH BRADSHER, DAVID JOLLY and EDMUND L. ANDREWS

Central banks around the world cut short-term interest rates by up to half a percent on Wednesday after investors across Asia and Europe unleashed waves of sell orders onto already depressed stock exchanges.

The Federal Reserve, the European Central Bank and other central banks from Britain and Switzerland to Canada and China announced rate reductions within seconds of one another. The British government separately announced a plan to pump billions of pounds into the country’s leading banks as part of a plan that would result in considerably greater government influence over the financial sector there.

The Fed said in a statement that, because of weakening economic activity, it had cut the Federal funds target rate by half a percentage point, to 1.5 percent. It also cut its discount rate by the same amount. The vote was unanimous.

The European Central Bank cuts its benchmark rate to 3.75 percent, from 4.25 percent.

The moves had some initial effect on stock markets. European markets pared their heavy losses after the announcement, only to fall again. On Wall Street, investors showed little sense of direction.

The Dow Jones industrials lurched from a 200-point drop at the open to a 200-point increase just 45 minutes later. The Dow was slightly lower after 10:30 a.m., but continued to fluctuate widely.

Federal Reserve officials said Wednesday’s action was the first time ever that the Fed had coordinated a reduction in interest rates with other central banks, though the United States has periodically joined with other countries to intervene in currency markets to stabilize foreign exchange rates.

The closest thing to a precedent came in November 2001, when the Fed and the European Central Bank announced a rate reduction on the same day. But those actions were nominally independent, and they did not involve any additional foreign central banks.

The cut came despite what had been a divergence of views between the United States and Europe ever since the financial crisis erupted in August 2007. The European Central Bank had been much more reluctant to lower interest rates, because policy makers there tended to see the mortgage meltdown primarily as an American problem with secondary ripple effects in Europe.

But any lingering comfort outside the United States evaporated in the last week, as money markets froze up around the world and major corporations and banks across Europe began suffocating from their inability to do even routine financial transactions.

Making matters worse, none of the epic emergency measures taken in the United States — the passage of a $700 billion bailout plan to buy up distressed securities; a doubling and redoubling of emergency loan facilities at the Fed to $900 billion on Monday; and the Fed’s unprecedented decision on Tuesday to start buying up short-term commercial debt for businesses of all types — had prevented the stock markets from plunging at vertigo-inducing amounts day after day.

Some analysts responded positively to the news.

“At last, a coordinated show of force,” Ian Shepherdson, chief United States economist at High Frequency Economics, wrote in a note. “The move is to be applauded but there is more to come. The playbook to avoid depressions says rates need to be as close to zero as possible.”

Other economists were cautious about whether the various measures would be successful, after previous plans like the United States’ economic bailout have not halted steep declines in share prices.

“There’s no silver bullet for these problems,” said Derek Halpenny, a currency strategist at Bank of Tokyo-Mitsubishi UFJ in London. “But the actions by the Fed on Tuesday, the U.K. government’s bailout plan today and the bit-by-bit approach European governments are taking show the authorities are getting more proactive.”

Tumult in financial markets is starting to spill into Asian political systems. Japan’s prime minister, Taro Aso, promised a committee of Parliament on Wednesday that he would postpone national elections, which had been expected early next month, to focus on the unfolding financial crisis.

“Honestly, this for us is beyond our imagination,” Mr. Aso told the budget committee. “We have huge fears going ahead.”

Most Asian markets closed before the central banks acted, and share prices across the region suffered a drubbing.

Wall Street panic rolling over consumers worldwide

Wall Street panic rolling over consumers

worldwide

By Michael Conlon

CHICAGO (Reuters) – A London businessman may have to put off his wedding. A baker in Paris fears customers will disappear. A student in Slovenia sees an automobile loan fall out of reach. And a real estate agent in Chicago says she’s just plain scared.

The worst financial crisis since the 1930s was stark reality for millions on Wednesday as retirement savings evaporated, jobs disappeared, stock market values slipped again and a dramatic cut in interest rates by central banks from Europe to Asia did little to stem three weeks of near panic.

What the International Monetary Fund termed a major downturn for the world economy was already evident to many, like the elderly Illinois couple who said this week they’d stashed $100,000 in cash fearing a bank failure or U.S. automobile dealers hit with the worst sales slump in 15 years.

“I’m scared, really scared,” said Cathy Ivcich, 45, a Chicago real estate agent. “People have stopped buying houses. I’ve got a lot of buyers who have secure jobs or who have money, and I’m sure I could get them a loan. But they’re just scared. Their feet are stuck.”

She’s stopped going out to dinner and “all those canned goods in the pantry, we’re trying to find a way to use them,” she said.

In London 39-year-old Neil Taylor worried whether the money he’s earned from his scaffolding business is safe in the bank, and he may take it out. In the meantime he’s cut back spending and is “thinking about putting off my wedding.”

An angry fellow Londoner Steve Gallagher, 52, a building contractor, found it hard to believe “that common sense went out the window and greed flew in. It was a fool’s rush … I know that if I had committed what looks like fraud, I would be fired.”

Buenos Aires businessman Nelson Lampert, 25, has put off a trip to Cuba for the technology company where he works, fearing global uncertainty and the impact of running up dollar-based credit card debt during travel.

At a bakery shop in eastern Paris Latifa Mohsni, 56, said some people are cutting back on their purchases already and though “we’re doing fine here … I’ve heard plenty of customers say they’re worried about what all this crisis talk really means. I think it will hit us eventually.”

For Jost Ivancic, a 22-year-old student in Ljubljana, Slovenia, the situation makes it “even more improbable I could get a bank loan to buy a house or a car. I have no money to speak of right now.”

In Iceland, where Adam Stempinski, 38, found construction work after leaving his native Poland, “It’s getting more difficult to make ends meet. But I believe the country will pull through. I’m staying here, I’m still better off here than in Poland.”

Taxi driver Joe Green in Washington, D.C., said he was finding fewer customers, fewer tips and a 40 percent cut in earnings after 20 years driving the streets.

“I am struggling to pay everything. The other day I wanted to go buy shoes but first I had to get gas and $20 doesn’t go very far any more … If I was to get sick or my car was to break down I would be dead broke. I used to take my wife out and go to Atlantic City. I can’t do that no more,” he said.

Emily Chamberlin, 39, an events manager at a Smithsonian museum in Washington, said her real estate agent husband has not sold a house in three or four months, so the couple has cut down on entertainment and have put travel plans for next summer

on hold.

“But here I am holding a $4 Starbucks coffee. I love my Starbucks,” she said.

Deborah Taylor, 37, a stay-at-home mother in Cincinnati, said she and her husband are considering switching their retirement investments “maybe to commodities … I don’t know much about investing and he doesn’t either.”

In the U.S. heartland, where 39-year-old Jackie McMahon and her husband run three candy stores in the Kansas City, Missouri, area, sales are off, and costs are up.

“It’s just getting by day to day. It’s a feeling of total insecurity,” she said.

Thursday is D-Day

Thursday is D-Day

Forget the stock market gyrations. Forget Bernanke and Paulson’s ineffective, unconstitutional schemes.

Thursday’s auction for Lehman’s credit default swaps (CDS) is much more important.

Why?

Well, if banks are reassured by the CDS auction, it could do more to free up frozen capital than all of the Fed and Treasury’s ill-conceived plans put together.

As Bill Gross, head of $721 billion dollar fund Pimco, says:

Credit markets are based on trust and when there is no trust, markets can freeze up . . . . Imagine yourself at the drive-thru ordering a Big Mac. At one window you order and pay, at the other – 20 feet ahead – you pick up your lunch. What if you thought that after paying at the first window, your 1000 calorie sandwich might not be waiting for you a few seconds later. You might not pay; business as usual might not take place. That is what is happening in the credit markets. They are frozen in “McFear.” After the failure of Lehman Brothers – an investment bank which took orders at one window, and promised to pay at another for trillions of dollars of those CDS, swaps, and other derivative “sandwiches” – institutional investors said that they’d prefer to stay at home and have peanut butter instead of risking their money ordering a Big Mac. And so their money goes into that figurative mattress instead of the register at McDonald’s, people are laid off, profits go down, bank loans become less available, our economic center cannot hold.

An auction occurred today to determine the value of Freddie and Fannie’s CDS. While there were approximately $500 billion in CDS written against Freddie and Fannie, those who issued CDS will be repaid between 91.5 percent and 99.9 percent of protection they sold. In other words, the issuers of such CDS will only have to pay out between .1 and 8.5 cents on the dollar.

For a rough, back-of-the-envelope calculation, let’s split it down the middle and call it 95% of $500 billion, which means that the issuers of Freddie and Fannie CDS will only have to pay out about 5 cents on the dollars, or about $25 billion total. That’s a lot of money, but not catastrophic.

On the other hand, “investors who wrote protection on a Lehman default will have to pay out between 81 and 85 cents on the dollar.”

No one has disclosed how many billions of dollars in Lehman CDSs are out there. And no one knows the exact payout amount which will be determined at Thursday’s auction.

But it is known that “Lehman was one of the 10 largest parties participating in credit default swaps, the New York Times reports. The company’s most recent quarterly filing said it bought and sold $729 billion in derivatives with a fair net value of $16.6 billion.” And a lot of people bought CDS betting on Lehman’s failure in September.

D-Day

So Thursday is D-Day, where “D” is for “derivatives”.

If there are a lot of Lehman CDS out there, and if the auction price comes in high, it could greatly exacerbate the global economic crisis no matter what Bernanke and Paulson do. On the other hand, if there aren’t that many CDS out there, or if the price comes in lower than people expect, it would be a huge sign of stability in the CDS market that could reassure financial institutions and investors worldwide, which could “free up liquidity” and help avert a depression (no matter what Bernanke and Paulson do).

Washington Mutual’s CDS auction is October 23rd, and we might not have a final answer on how big the CDS crisis is until then.